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Healthcare IT will continue to be big as a new standard of coding rolls out, and Shire's upcoming FDA decision won't leave a dry eye in the country

The highly anticipated switchover to ICD-10 medical coding kicks October off, and an FDA decision later in the month could move the needle at Shire Plc(NASDAQ:SHPG). All this and more on today's episode of Industry Focus.

A full transcript follows the video.

Kristine Harjes: What to watch in October. This is Industry Focus.

Welcome to Industry Focus, healthcare edition. Like it or not, October is here. I'd say it's officially time to get in the fall mind-set, start thinking about Halloween costumes and maybe what the month has in store for the healthcare industry. I'm Kristine Harjes and joining me to chat via Skype is healthcare contributor Todd Campbell. Todd, can you believe we're talking about October already?

Todd Campbell: I really can't -- it's a gray sky out here today in New England, and I'm already starting to think about my winter vacation plans. It's just not right.

Harjes: You're way ahead of me. I'm still dwelling on the Thanksgiving plans and Halloween costumes.

Campbell: What will you dress as this year?

Harjes: I have no idea. October sprung up on me, but I guess now that we're here we've got two things on our mind for this month. There's a PDUFA date coming up at the end of the month and a shift in the way medical coding is done.

We'll start with the latter since this change is going into effect tomorrow, October 1. All healthcare providers, starting tomorrow, are going to have to shift from a standard of medical codes known as ICD-9, to an updated version known as ICD-10.

Todd, can you give our listeners some background?

Campbell: Sure. I think the easiest way to explain this is just to think about it from the doctor's perspective. If you're a patient and you go in and you get treatment, your doctor looks at you and tells you what you can do to improve your condition and then sends you on your way.

But there's a lot of back-office things that occur at the doctor's office after that visit. That includes figuring out how they're going to get paid for providing that service to you. One of the ways they do that is by using a coding system based upon whatever it was you discussed with your doctor that day. Previously, until tomorrow, the U.S. was using ICD-9 and that was a very antiquated coding system. This has been around for almost 40 years.

Harjes: Yeah, it's been the standard since 1979.

Campbell: Yeah, getting very long in the tooth. People argue that it's an incredibly inefficient way to bill for services because it was put in place prior to all the technology that allows for online billing of an insurance company, or to Medicare, which is obviously the granddaddy for a lot of these providers and sources of income.

Harjes: Meanwhile, all the other countries have been using ICD-10, which is the new version of this coding system, for more than a decade and the U.S. is the only country in the industrialized world that's still holding out.

Campbell: We've absolutely been dragging our feet on this and it's much to the -- all these foreign countries are like "Come on!" They'll pull kicking and screaming and they want to be able to share data and come up with new findings as a result, but the U.S. has been reticent to disrupt how healthcare is provided. Obviously, switching over from a system that has less than 20,000 healthcare codes to a system that has 130,000 to 140,000 codes is no small feat.

It's also a pricey and time-consuming prospect. Hopefully, providers have taken the initiative and gotten on top of this because over the course of the last couple years as deadlines were approaching to get us switched over to ICD-10, providers continually pushed back and said they needed more time.

Harjes: This switchover was supposed to happen a long time ago and private insurers have signals that they're ready. They've said to bring it on and they want this updated version, but it's the providers themselves, the healthcare practices that are dragging their feet. Apparently, in October last year 82% of healthcare practices have said they're not quite ready for it and needed more time.

An entire year was given as an extension and we're now finally bumping up against the date, tomorrow, when the switch will finally be made.

Campbell: Doctors are pretty pressed for time as it is. I think a lot of them were looking at practicing medicine rather than dealing with the back-office nightmares that are likely to occur. The other issue is when you switch over from something so much more complex, something that is brand-new -- anyone who's coding in medical offices today has been using this ICD-9 for their entire career.

It's not like they've changed many times and this is just one more change. There are a lot of opportunities for error and in that error, if there is error; that could significantly derail the income stream for these practices. If you don't code correctly, the payer can deny the claim.

If the payer denies the claim, that means the doctor will then have to jump through many more hoops to provide the information necessary to that payer. That means there could be potential delays in receiving payment, it also means potentially never receiving payment depending on the certain situation.

There's a lot of reasons that doctors have basically put off getting things in place until the last minute. The vast majority should be OK. A study that was done in the middle of September showed that only 30% were ready to go as of September 15, but well over 80% said that they're most likely going to be ready and more than 90% said they'll probably be ready.

Harjes: "Probably" is the key word there. I've seen a lot of responses from different doctors in practices throwing it out there on different forums saying they'll probably be OK, but they're not sure. I saw once a group of physicians were polled and they said that 33% of them took out a line of credit to protect against the financial impact against potential delays.

Campbell: Yeah. That was a standard operating procedure recommendation from a lot of the companies that have been hired as consultants to come in and help practices prepare for this launch. Essentially, they'll need to protect their revenue stream by knowing you can tap into money if there are delays.

Harjes: As investors, what does this mean for us?

Campbell: There are a couple different takeaways. There could be some difficulties for hospitals, but most hospitals that are publicly traded are large institutions. They have tremendous resources, most likely the impact on them -- if any -- would be pretty small. Instead, a much bigger impact would probably come in the form of upside to healthcare IT companies whose software is being deployed to make it easier to collect the revenue from the patient, or the payer.

Also, the software that they're selling that's going to leverage all this new data -- think about all the opportunity that having so many more codes they provide, you'll now be able to parse that data in so many different ways and that could be used to help design treatment outcomes to evaluate the quality of care that's being provided, to better identify global threats of epidemics such as Ebola, or something else occurring in the future.

There are a lot of opportunities here for those companies that are going to be analyzing the data. I like Cerner (NASDAQ:CERN), which is one of the companies in that space. They're a big player and the second largest in market share in many of these markets. I also like Athenahealth (NASDAQ:ATHN), which has a very big present in the private practices of doctor's offices and helping them get up to speed in the healthcare IT.

Harjes: You mentioned the granularity of the data and I totally agree that there's so much opportunity there, and in this new catalog of codes, you've got more than 200 different codes for diabetes alone, there's more than 100 different codes for gout. I think I even saw that the government's listed more than 30 different codes for industries caused by acts of terrorism.

You get really specific with this kind of data. The ability to analyze it just increases exponentially. I think that could be good news for insurers, too.

Campbell: Absolutely. As you're able to dig deeper into this data, you should be able to find cost savings. It increases efficiency, you should be able to design treatment protocols that work more effectively that would reduce readmissions or disease progression. All of those things could result in cost savings for payers like insurers.

Harjes: This does seem like this entire shift, even if it does cause some bumps in the road for small practices in the short term, healthcare IT is still going to be big. All these new waves of technology are going to continue to reform the industry and probably make it even more profitable, hopefully across the board.

Campbell: None of us probably wanted to upgrade our Windows software, but anybody who's trying to run Windows 3 right now is probably struggling.

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Moving on, the most important PDUFA date of October is coming up at the end of the month. Todd, what's going on?

Campbell: One of the things I like to do -- and I think this is helpful for all investors who are listening, or watching on the program -- at the end of every month, go online and do a bit of due diligence and look and see what's on the calendar at the FDA because decisions that are coming out of the FDA can have a huge impact on the direction of a stock price in the near term.

While you shouldn't be investing over a period of weeks, you need to have a longer-term thesis, you can't ignore the potential impact of a new drug that could potentially be coming to market. Looking at the calendar for this coming month, the company that I think could really see the needle move on an approval would be Shire. Shire submitted an application for approval for a treatment for treating dry eye disease earlier this year.

One of the most common complaints of people going into eye doctors is the negative effects, and pain associated with dry eye. Shire has a drug that it believes will do a better job than anything that's currently out there at helping to relieve the symptoms of this condition. If so, Shire thinks this drug could be worth $1 billion a year in sales at some point.

Harjes: Care to take a stab at the pronunciation of this drug?

Campbell: Oh, boy. Lifitegrast. I always struggle because with the generic names of the drugs, it's either to-may-to or to-mah-to. Lifitegrast is what I'll go with today.

Harjes: OK. We can go with that. Lifitegrast.

Campbell: This is an intriguing drug. One of the reasons I'm so intrigued by it is that a dry eye typically occurs more frequently as you get older. As a long term investor, one of the trends I think investors should be focusing on is an ever larger, older population her in America. As baby boomers continue to get older, there's likely more baby boomers who are going to be going to their eye doctors and complaining about this condition.

If so, the demand for this drug could be strong. If it is strong and sales are strong, then it certainly helps propel Shire toward that goal they have of 10 billion in sales by 2020, which would roughly be a doubling from where they were when AbbVie was courting them as part of that failed merger.

Harjes: Right. I think one of the most promising signs for this drug and its upcoming potential approval is the fact that it received priority review. What exactly does that mean? Why is that so important?

Campbell: Typically speaking, when you have a drug in development coming through the works in the pipeline, it addresses a condition that is an "unmet need." The FDA will give you a perk. They will say that they understand that they're developing something for a condition that doesn't have a lot of effective therapies for.

What' they'll do is cut the amount of time that they spend in reviewing that application. In this case they're reducing the application review to 8 months from 12 months. In reducing that time and giving it priority review, that theoretically allows the drug maker to get that drug to the market more quickly and to capture those additional months of sales. For a $1 billion drug, that can be pretty substantial.

Harjes: Exactly. One of the things that's got people talking about this drug is that the phase 3 trials produced mixed results and there's already a drug developed by Allergan that's out there to treat this disease, but I think getting priority review for this drug from the FDA is a really good sign for it. There's got to be something there that the agency is seeing that could revolutionize this treatment space.

Campbell: Yeah. Again, that phase 3 trial does make it really interesting. That's another reason why we want to be watching this as investors this month. On the one hand it improved the symptoms of dry eye, but on the other hand key biomarkers that are used to evaluate dry eye didn't really improve. There's a bit of a disconnect on the efficacy side of this.

However, on the safety side, it did appear to fine. There were no real serious adverse events that led to mass discontinuation of this drug. I think what will probably happen is -- if I were going to handicap this -- the FDA will probably say they've got a safe drug for a condition that there aren't a lot of effective therapies for, and it works on the symptoms. Then they'll go ahead and approve it.

There is the risk that they approve it conditionally where they say they'll approve it but the company then has to come out with another study just to resolve that discrepancy in the primary outcomes data. If so, that would hinder the profitability of this drug for Shire because trials are expensive.

Harjes: Exactly. The other thing to keep in mind is that the 25th is a Sunday. I'd say it's more likely than not that we'll actually hear an answer before then. Definitely keep your eyes peeled. This will be a really interesting catalyst for Shire.

As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks. So, don't buy or sell anything based solely on what you hear on this program. Do your research on Shire and Allergan and everyone else that we've mentioned today. Keep your eyes out for this FDA decision coming up sometime prior even on October 25.

Todd, thanks as always for being here and folks, thanks for joining us today.

Author

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.
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